Domino's bounds ahead

Official statistics report that retail sales volumes actually grew 2.1 per cent year-on-year in February. But that decent figure comes on the back of a truly horrendous 3 per cent drop in retail sales in January. Together they show that consumer confidence hasn't yet returned and that the UK economy remains fragile. Even after the Office of National Statistics revisited last year's economic data, a modest upwards revision to just 0.4 per cent growth in GDP in the final quarter of 2009 was all that their number crunchers could manage. That's hardly a return to sustainable economic growth and a slide back into recession remains possible.

But some companies are better placed to cope with the uncertain backdrop than others and Domino's Pizza looks especially well placed. That's because it benefits from the tendency of cash-strapped consumers to trade down to take-away food when times are hard and visiting restaurants has become too pricey. Indeed, at a time when conventional restaurant operators have seen sales struggle, Domino's Pizza has delivered impressive growth. Last month, for instance, management reported that like-for-like sales had soared by 10.5 per cent in the 13 weeks to 28 March. In addition, adjust for a £15m exceptional gain that swelled 2009's profits (see table) and broker Numis Securities expects both underlying pre-tax profit and earnings per share at Domino’s to rise by a healthy 12 per cent in 2010.

Against the background of that robust growth, the group's expansion has continued unabated. Just since the start of 2010 Domino's has opened eight new stores - bringing the total to 616 - and management says that plans are on track to achieve the target of 55 new store openings by the end of this year. And that growth isn't being pushed through at the expense of profits. "The average franchisee is achieving a profit of £520,000 per annum and cash returns in excess of 50 per cent, whereas the average competitor is barely profitable," say analysts at Numis Securities.

The scale of advertising spend at Domino's is helping to deliver an edge over its rivals as well. Numis reckons that budget will total at least £44m in 2010. "This is a major volume driver and competitive advantage for Domino's," says the broker. The group's decision to splash out sponsoring the popular television talent show, Britain's Got Talent, certainly seems to have delivered a sales boost. "With viewing figures for the show exceeding everyone's expectations, the three-year sponsorship proved a well-timed decision," said chief executive Chris Moore with the group's full-year figures in February. That deal still has a year left to run and so the group should receive another sales fillip when the show starts up again in the summer. While canny promotions, such as the company's two-for-Tuesday offer, have helped bring in business at the expense of competitors.

True, a prospective dividend yield of under 3 per cent, based on Numis' 9.3p a share forecast payout for 2010, isn't much to get excited about but, then again, shares in Domino's are hardly an income stock. The apparently chunky ratio of net debt to equity (see table) isn't, however, as grim as it seems. Net debt stood at £32m at end-2009, which is about the same as cash profit at Domino's last year. What's more, Numis expects the debt burden to drop to £10m by the end of 2010.